After the Fire, Rebuilding U.S. Housing Policy

We all know the Great Recession set fire to the housing market. But because the US government plays a extraordinarily intimate role in the housing market, it's fair to say that the Great Recession also set a fire under our housing policy. Rep. Barney Frank, the influential chairman of the House Financial Services Committee, is worrying loudly about the safety of government-chartered mortgage loan companies Fannie Mae and Freddie Mac, and Treasury Sec. Tim Geithner says the government will release a long-term housing strategy in 2011.

But the debate is underway today. Robert Shiller, the Yale economist behind the influential Case-Shiller home price index, had a column in the Sunday New York Times on the many reasons the government plays a large role in homeownership. Shiller locates "a long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity." But just some people believe homeownership is good for America doesn't mean the United States should be in the real estate business.

According to a piece in CQ Weekly by Robert Tomkin, our housing policy is uniquely designed to encourage homeownership compared to the world. Only the US offers full tax deductibility of mortgage interest payments. Only the US "maintains a government agency that insures mortgages (the Federal Housing Administration), a government agency that guarantees mortgages securities (Ginnie Mae), and government-chartered companies that buy and sell mortgages securities (Fannie Mae, Freddie Mac and the Federal Home Loan Bank system)."

Despite this unique government promotion of the housing market, US homeownership rate (67%) lags behind countries like Spain (86%), Ireland (75%), Australia (70%), the United Kingdom (70%) and Canada (68%). In Canada, government-backed mortgages account for only 30 percent of the market. In the United States, the number is 85%.

Like so many things, the push to reform our housing policy derives from -- and is contained by -- the recession. On the one hand, economists note that the full deductibility of mortgage interest encourages widespread debt, and that the successful securitization of mortgage loans grew banks' appetite for more customers and riskier customers, which walked us toward a subprime meltdown. On the other hand, removing the tax subsidy on mortgage interest (and replacing it with, say, a single multi-thousand dollar tax credit for each home buy) would cause already weak home prices to collapse, and it's crazy to imagine that outlawing complex mortgage-backed securities alone will prevent future housing crises.

The health care debate revealed a deep-seeded resistance against large-scale reforms, both in and outside of Washington. But our federal support for home mortgage finance will eventually require its own time in the reformist spotlight. Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation summed the problem up nicely in the CQ Weekly piece: "These policies amplified the boom as well as the resulting bust ... This crisis represents the culmination of a decades-long process by which our national policies have distorted economic activity away from savings and toward consumption, away from our industrial base and public infrastructure and toward housing, away from the real sectors of our economy and toward the financial sector."